Almost one year ago, Congress enacted a sweeping tax reform. But the new tax code may cause your company to run afoul of state labor codes.
In 2018, tax reform brought tax cuts to corporations and individuals alike. In exchange for those tax cuts we have a more simplified tax system. The simplified system has eliminated the ability of U.S. taxpayers to write off unreimbursed business expenses. This change will bring challenges to both employees and employers in 2019—a tug of war of sorts between the changes to the federal tax code and the demands of state labor codes.
The tug of the tax code
Under the new tax code, employees who drive a personal vehicle on behalf of an employer will face significant challenges. In the past, these employees have been accustomed to deducting unreimbursed vehicle expenses, often by using the IRS mileage rate to calculate the amount. These mobile employees could now face a significant shortfall when they file their taxes in early 2019.
If your organization does not have a vehicle reimbursement program or has not reviewed its vehicle reimbursement policy recently, this new tax situation may force your hand.
In past years, most companies would employ the easiest method of offsetting employees’ vehicle expenses, typically with either a monthly car allowance or a mileage reimbursement rate. If the amount was insufficient, it was the unspoken justification that employees could write off the difference during tax time, which would make their vehicle reimbursement whole. In the wake of the tax reform, there is now a fundamental problem with this logic.
Employees will seek ways to make their car reimbursement whole, and it will come at the expense of the company. And state labor codes may be just the means to do it.
The tug of state labor codes
Several employee-friendly states have labor codes that require the full and proper reimbursement of business expenses. CA Labor Code 2802(a) is one of the strictest labor laws in the country and has resulted in millions of dollars in penalties and fines. A number of other states have also been known to penalize companies that pass on business expenses to employees, including vehicle expenses that are not addressed with an accurate, sufficient car reimbursement or allowance. If an employee can prove they were under-reimbursed under the company policy, they have a case.
These expense indemnification laws exist in such states as Massachusetts, Rhode Island, North Dakota, and South Dakota. There have been lawsuits in other states related to employees not being reimbursed (Michigan, Illinois, New York). If you have employees working in California or any of these states, take heed of the new tax situation. But even if you don’t, be aware that the tax reform may place pressure on additional states to tighten up their labor laws.
Now that many employees driving personal vehicles for work have lost an important tax deduction, they will seek recourse for the lost income. Employees may now be more likely to report violations of labor laws or file lawsuits as a way to force their employers to remedy the situation.
The question is, how many organizations know what’s coming?
Who’s caught in the middle?
In this tax code-labor code tug of war, companies are left stuck in the middle.
The tax reform is stating that employees can’t write off unreimbursed business expenses.
Employee friendly states are saying the company must indemnify employees from business expenses.
The company will bear the consequences. If you are not reimbursing employees properly, you could see any or all of the following effects:
- High attrition rates
- Employees taking advantage of your policy
- car allowance – traveling less
- mileage reimbursement – reporting more mileage
- Difficulties attracting talent
- Fines/penalties from labor code violations
- Class action lawsuit under labor laws
Protecting your company by getting proactive
Tax reform has increased the risk of companies across the country. This is an opportunity not only to protect your organization from risk but also to gain an edge over less proactive competitors.
Going into 2019 many employees are going to expect to write off business expenses. The word hasn’t gotten out yet that they won’t be able to. Many companies are unwisely taking a wait-and-see approach. They are waiting to see how the tax reform will impact employees and if employees will actually complain and react.
But the word will get out. Employees will take matters in their own hands. They will realize that they are not alone. State legislatures may tighten up labor laws to address the situation. And companies across the country will find that they have no choice but to change their car reimbursement policy.
Don’t wait and see. Take action now. Adopt a defensible, sufficient vehicle reimbursement. It’s fair to employees, and it will protect the organization in the long run.